With the Beijing Show kicking off today (first press day), it's worth considering where the Chinese market and industry stands, in terms of long-term development. It's still an industry dominated by the big foreign-domestic partnered joint ventures, but is also a highly fragmented industry. The Chinese government would like there to be more consolidation (to facilitate scale economies, more efficient investment, boost global competitiveness), but that's been politically difficult to implement because of the regional structure that still dominates.

While the market and industry was growing strongly that structural problem was effectively put on the back-burner; everyone could grow volume and make money and we saw the emergence of the smaller independents and a proliferation of domestic brands with cheap product for entry-level segments.

The market situation has changed significantly over the last year though. Beijing has sought to cool the Chinese economy amid fears of overheating and price inflation. In this it has largely succeeded. And the car market has cooled off, too. LMC Automotive forecasts a 9% growth in China's passenger vehicle sales in 2012, a much lower rate than in previous years when China's new vehicle sales surged at double-digit rates (vehicle sales grew by a third in 2010). And new sales are increasingly having to be sought in the so-called tier 2 and tier 3 further inland cities, the big eastern urban centres that were the source of 'easy sales' in the good years becoming more saturated and congested.

Profitability problems are now being encountered for the domestic brands in particular. That is partly because the domestic brands are heavily positioned in entry-level segments where sales are particularly slow amid higher fuel prices. Foreign brands, and especially the premium makers where prices are less sensitive, seem to be faring much better.

And there is also the fact that dealers are vulnerable in China because they are heavily dependent on making money from new car sales rather than the other revenue streams that boost profitability in more mature markets – such as consumer finance, used car sales and aftersales care. That will all come in time, but right now the softening of demand in China is hurting some makers and dealers immediately. In many ways it's a consequence of China's explosive car sales growth over the last five years. Things like an aftermarket and used car sales infrastructure have yet to properly develop in China.

These growing pains could, however, turn out to be a blessing in disguise. The current automotive growth slowdown and its adverse financial impacts could well encourage the broader industrial consolidation that the Beijing authorities would like to see over the next 2-3 years. If it does, that would improve the Chinese automotive industry's competitive position just as the domestic market starts to mature (so that those 'other' revenue streams pick up to boost profitability). A more settled and less fragmented domestic Chinese auto industry might then be in a better position and with better products to export to developed markets. And global suppliers will also have a clearer post-consolidation picture of the Chinese OEM landscape to help them better determine where they should invest.

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